OZ shareholders may have left much copper in the bush by taking BHP’s bird in the hand

OZ Minerals shareholders have done what was expected by giving their overwhelming support to BHP’s $9.5 billion takeover bid.

The 98.33% vote in favour of the revised and higher offer of $28.25 a share (including the payment by OZ of a $1.75 franked dividend) means one of the great names in modern Australian mining history will disappear before long.

Its roots go back to the formation of Golden Plateau in the 1930s. But it wasn’t until the 1990s that it began to take on its modern form when the bustling Owen Hegarty came along and renamed it Oxiana.

After some years spent cap in hand up and down Collins Street raising pennies, Hegarty and Oxiana stepped up in a big way in 2004/2005 with the acquisition of the Prominent Hill copper discovery in South Australia (still part of OZ), and the Golden Grove copper/zinc mine in WA (now part of 29Metals).

There’s lots of history since to become OZ but all that needs to be said now is that it will be sad to see it go.

It must be said though that the 98.33% acceptance level is something of a surprise.

The BHP offer obviously presented as a bit of a sugar hit for OZ shareholders, particularly with the franked dividend payment. But it has also got to be asked if they have sold themselves short.

The copper price is holding above an elevated price of $US4/lb despite economists saying we should all be worried about recession because of the battle between interest rates and inflation in the major economies.

But someone forgot to tell China, the biggest copper consumer. Chinese copper consumption has taken off as its economy rebounds from last year’s COVID lockdown. It has been key factor in copper inventories plunging to levels not seen since 2005.

Kostas Bintas, co-head of metals and minerals at the world’s biggest privately held trading firm Trafigura, has been ringing the alarm bells on the issue.

As reported by the Financial Times, Kostas said last month that copper will probably surpass the record $US4.92/lb of March 2022, and could even hit $US5.44/lb.

“I think it’s very likely in the next 12 months that we will see a new high,” Bintas said at the FT Commodity Global Summit in Switzerland. “What’s the price of something the whole world needs but we don’t have any of?”

It was a good question, but not one that was asked at OZ’s shareholder meeting on Thursday. Maybe they took as fact an assessment by Grant Samuel, the independent expert on the bid, that copper would average $4.17/lb in CY2023, stepping down to $US4.08/lb in CY2026, and remaining flat thereafter.

And that was its high-case scenario!

BHP wasn’t on hand to give its copper outlook at the OZ meeting. But its recently released commodities outlook did have some things to about copper’s outlook, without making any actual price calls.

BHP said it expects the recent commissioning of some big overseas mines will lead to 12% copper production growth from 2021 levels by the end of 2024.

After allowing for an increase in scrap availability, it reckons the copper market will need to absorb the additional production over the next two years at a time when demand in the developed world is expected to be at a low ebb (those recession fears again).

But once the implied surplus passes, BHP said a “durable inducement pricing regime is expected to emerge in the final third of the 2020s,” which is why it is forecasting “pronounced” deficits to emerge in the medium-term future.

The assumption is that OZ shareholders that waved through the BHP bid were not interested in waiting for the pronounced deficits to take shape. But in-the-field types like Trafigura reckon the shortages are here now.

Caravel:

If the copper price is in fact headed off into record territory, OZ shareholders will have sold themselves short. Too late for them now.

But assuming a big percentage of the proceeds from the BHP acquisition get rolled back into other ASX copper producers like Sandfire (SFR) and 29Metals (29M), leverage to copper’s upside can be restored. It is notable that Sandfire in particular has been a strong performer of late.

Beneath those two there is a bunch of copper juniors which offer much greater leverage, not only to $US4/lb copper (or Grant Samuel’s $US4.08/lb long-run price), but to the potential for the $US5-$5.50/lb prices Bintas said were likely.

Development projects that look okay at $US4/lb can fly at $US5/lb (including those being acquired by BHP in the OZ takeover).

Caravel (CVV), which has just released an independent project enhancement study on its namesake project in WA, is a case in point.

It is a big low-grade deposit (1.18 billion tonnes at 0.24% copper with molybdenum credits) some 120km north-east of Perth.

The study outcomes included a 10% increase in plant capacity to 30Mtpa and a molybdenum recovery circuit for a modest increase in capex to $1.7b from $1.6b, with all-in sustaining costs reined in from $US2.37/lb to $US2.07/lb.

From those figures it can be seen that the low-grade is not the barrier it might seem. The bulk mining of the ore in low-strip open-cuts, the existence of supporting infrastructure, and the availability of drive-in local workforce, makes projects like Caravel work.

Using a $US4/lb copper price forecast, the pre-tax NPV of the bigger project rises from $1.5b to $2b. And noteworthy here is that the company has said previously that each US50c/lb rise in copper price assumptions adds $900m to the NPV.

Assume $5/lb copper and the NPV grows to $3.8b, $US6/lb copper would make for an NPV of $5.6b. There was little wonder then that on the release of the bigger picture at Caravel on Thursday, the stock put on 4.5c or 18.75% to 28.5c for a market cap of $136m

The stock was last mentioned here on March 23 when it trading at 20.5c. Apart from the kick that came from Thursday’s enhancement, it seems like that the recent gains also reflect a stepped up search by investors for leverage to the copper thematic.

Canaccord has a 50c price target on the stock and is revieing the impact on its valuation of the inclusion of a molybdenum circuit.

“If 60% of the molybdenum can be recovered with payabilities of 75% of a $US20/lb sale price and upfront capital of $50m for the circuit, an additional 7c could be added to added to our Caravel valuation,” Canaccord said.